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2014 AACE INTERNATIONAL TECHNICAL PAPEREVM.1747Effective Use of Earned Value forControlling Construction ProjectsLaurie Bowman, CCP DRMP EVP PSPand Mina Sabouri, PSPAbstract— the effective management and control of construction performance is a keydeterminant in overall project success. It is in the interests of both the contractor and theowner to plan, measure, monitor and control construction progress so that:1. Project managers are well informed of problems and opportunities early and are betterinformed to make decisions that have a positive impact on project and;2. It is easier to identify delay, disruption and productivity problems and their root causes sothey can be resolved quickly so that stakeholders’ goals are satisfied and the risksassociated with dispute and litigation reduced.Key aspects of construction performance management include setting a valid performancemeasurement baseline, systematic performance updates, controlling scope change andregularly working closely with the project team to optimize forecasts to complete the remainingscope of work. By setting up the project well and systematically employing effective processesfor measuring progress, assessing risks, controlling scope changes and forecasting you canreduce cost risks and increase the likelihood of project success.EVM.1747.1Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERTable of ContentsAbstract .List of Figures .List of Equations .List of Abbreviations .Introduction .Setting up a Construction Project for EVM .Performance Measurement Baseline .Integrated Baseline Review .Progress Updates .Systematic Updating and Forecasting - Drum Beat .Reporting and Communication .Frequency of Updates and Record Keeping .Change Management Process .Risk Management .Design Package Risks .Constructability Risk .Weather Risks .Aligning Owners Team Baseline with Contractors Baseline .Site Instructions .Results .Cost Performance Analysis .Schedule Performance Analysis .Cost and Schedule Performance Analysis Combined .Improved Resource Forecast .External Interfaces .Analysis and Mitigation of Weather Impacts .Delay and Disruption Analysis .Discussion .Structure .The Drum Beat .Communication and Control .Mitigation of Disputes .Training .Conclusion .References .EVM.1747.2Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE 20222323232424252525
2014 AACE INTERNATIONAL TECHNICAL PAPERList of FiguresFigure 1 – Typical Project Weekly Reporting Cycle .Figure 2 - S Curve (Dollars) .Figure 3 – Period and Cumulative CPI (hrs) .Figure 4 – CPI (hrs) Analysis for Week ending 16th August .Figure 5 – Period and Cumulative SPI .Figure 6 – Cumulative SPI & CPI (hrs) .Figure 7 – Resource Histogram and Forecast Considering Productivity .Figure 8 – Average Rainfall .Figure 9 – Civil Works Sensitivity to Rainfall .Figure 10 - Quantity Curve Including Productivity Impacts .8131516171819202123List of EquationsEquation 1 – CPI EV/AC . 14Equation 2 – SPI EV/PV . 16Equation 3 – ETC Forecast Remaining Budget/CPI (excluding temporary disruptions) . 19EVM.1747.3Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERList of AbbreviationsAbbreviationExpansionACActual CostsAvAverageCBSCost Breakdown StructureCPICost Performance IndexEACEstimate at CompletionEOTExtension of TimeETCEstimate to CompleteEVEarned ValueEVMEarned Value ManagementFTEFull Time EquivalentHAZIDHazard Identification StudyHAZOPHazard and Operability StudyhrshoursIBRIntegrated Baseline ReviewLDsLiquidated DamagesNCRNon-Conformance ReportOBSOrganizational Breakdown StructurePMBPerformance Measurement BaselinePVPlanned ValueRAMResponsibility Assignment MatrixS CurveChart of planned, earned value and actual costs versus timeSPISchedule Performance IndexWBSWork Breakdown StructureEVM.1747.4Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERIntroductionThere are great benefits to be gained by effectively managing construction performance on aproject. This paper describes the application of earned value performance measures as appliedon the construction phase of a multidiscipline construction project. By utilizing Earned ValueManagement (EVM) principles and establishing effective project control processes both ownerand contractor can effectively identify and respond to cost and schedule risks such as resourceavailability, performance problems and scope changes. This paper outlines some key conceptson establishing effective EVM systems and processes, and outlines many of the benefits ofusing earned value on construction projects. It also provides practical examples of thesebenefits from a case study. The benefits of applying earned value management apply for bothowners and contractors and, contrary to popular belief, there are risk reduction benefits to anowner even if the construction contract is fixed priceSetting up a Construction Project for EVMPerformance Measurement BaselineAll EVM performance measures are made against the Performance Measurement Baseline(PMB). The purpose of this baseline is to establish a benchmark against which cost and schedulevariances can be measured, quantities tracked, progress claims validated and performancemetrics calculated. It is vital that a credible baseline be established at the start of the project sothat variances and performance measures are valid. The baseline is essentially a resourceloaded schedule containing the authorized scope of work and the overall budget for the work.Cost Engineers can then work with Contract Administrators to use the schedule as the basis toverify progress claims for the value of work accomplished as a contractor, or for claimverification as an owner. By aligning the schedule progress with progress claims it also helpsensure the validity of forecasts for remaining work are accurate.The steps involved in creating the baseline can be summarized as follows:1) Organize the WorkThis involves defining the scope of work, Work Breakdown Structure (WBS), identifyingcontrol accounts (the points in the WBS at which actual costs and schedule progress can becompared), identifying key stakeholders, defining the Organizational Breakdown Structure(OBS), defining the Responsibility Assignment Matrix (RAM), determining the cost estimate,determining the execution and contracting strategy, and defining the reportingrequirements.2) Create the ScheduleThis involves defining activities, determining durations, relationships, constraints, calendars,loading resources and costs to activities, identifying key interfaces and milestones, analyzingthe schedule health, applying coding and modeling project risk (ideally using quantitativeEVM.1747.5Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERcost and schedule risk analysis). The quantities, resources and budgets in the schedulecontrol accounts are aligned with those in the control accounts of the cost control system.The schedule is aligned with the assumptions of the project risk register and risks are crossreferenced in the schedule.3) Set the baselineThis step involves refining and optimizing the schedule, analyzing and validating the criticalpath, gaining buy-in from key stakeholders, documenting the basis for the schedule andcreating the baseline in the project controls system. The results of the quantitative cost andschedule risk analysis will be considered and costs and schedule contingency applied to anextent that depends on the risk appetite of the Project Manager and organization.Integrated Baseline ReviewPrior to accepting the PMB it is beneficial to conduct a review. The purpose of this review isthreefold; firstly to establish whether the project has a realistic plan to completion, secondly toverify commitment to the plan from key stakeholders and thirdly to establish a baseline thatcan be used to measure performance.The IBR Process verifies that project managers will be able to effectively utilize the project PMBto assess performance, and to better understand the project’s inherent risks.The IBR helps ensure the project has an achievable plan and, once approved, change controlshould be instigated to manage change to the baseline scope, cost and schedule.The benefits of an IBR include: Clarifies the objectives for the projectTo verify that all parties are reviewing the same scope of work including Engineering(Design Packages), Procurement (Contracts and Procurement Packages), Construction(Work Packages), Commissioning (Work Packages) and Project Controls (Work BreakdownStructure, Budgets, Quantities, Resources)Provides an opportunity for key stakeholders to align their expectationsPromotes Project Management Team member knowledge of the project plans and risksand opportunitiesDetermines whether the baseline covers the entire scope of work, is realistic and satisfiesthe project objectivesIncreases confidence in the project PMB, which enables timely and reliable cost andschedule projectionsClarifies the expected methods of measuring quantities installed and progress for thedifferent activities being undertaken e.g. Earthworks, Civil and Structural, MechanicalInstallation and ElectricalClarifies the expected reporting requirements for the projectEVM.1747.6Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPER Ensures there is alignment between quantities, resources and dollars the schedule and inthe cost control systemEnsures there is alignment between the quantities and costs in an owners team scheduleand the quantities and prices in a contractors Bill of QuantitiesDepending on the size and risk of the project the IBR can be either highly structured and formalor less rigorous and informal.Progress UpdatesSystematic Updating and Forecasting - Drum BeatPerformance reporting becomes more effective if the reporting process is designed to besystematic in nature rather than an ad-hoc compilation of progress information. The reportingprocess is an integration of a variety of time dependent inputs so the entire project controlsystem needs to be synchronized well. This requires that the project team be committed toprocess. For example weekly reporting provides project managers with frequent feedback onproject performance so that “surprises” are minimized and corrective actions can be takenquickly. For weekly reporting the project team needs to commit to providing status updates,timesheet submissions and other data on the day required (e.g. every Friday). The projectcontrols team then commit to the project manager to process the progress, cost and forecastinformation, analyze and deliver reports like clockwork every week (e.g. every Monday). Bymaintaining discipline in these areas it greatly improves the quality of status updates and thevalue of information that is provided to the project manager and other stakeholders. The chainis as valuable as the weakest link and if full team commitment to the process is achieved thenthe data flowing in will be timely and hygienic and the information provided to the ProjectManager will be valuable. Team progress meetings can be synchronized to occur every Tuesdaythereby having a fresh set of weekly earned value reports for each meeting. Cost Engineers andplanners can use the mid week period to implement approved changes and baseline updates sothat the schedule and costs structures are stable for the weekly update due on the Friday. Oncethese weekly Plan-Do-Check-Act performance habits are established they are easy to maintain.Some organizations may require significant culture change in order to achieve weekly EVMreporting in which case monthly reporting might be appropriate to begin with. A typical weeklyreporting cycle or “drum beat” is shown in figure 1.EVM.1747.7Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPEREarned Value Management SystemSchedules,Resource PlansUpdated (Monday)Weekly Update CycleResource LoadedSchedule Updated(Friday)EVM Reports ProducedCritical Paths AnalysedVariances AnalysedPerformance EfficiencyCalculatedForecasts prepared (Monday)Reports Available forProject Team WeeklyMeeting, EVM SystemReady for next update(Tuesday)Save a copy ofSchedule and Reportsfor future reference(Tuesday)Actual Costsand/or ManhoursCollectedFinancial System(or Contractor)(Monday)YESProject Management Team ReviewsReports checks Variances ComparesLabour Forecasts with Availability(Monday)Decide Whether:- Changes to Schedule dates required.- Changes to resourcing plansrequired(Monday)NOFigure 1 – Typical Project Weekly Reporting CycleReporting and CommunicationThe earned value management system is a valuable communication tool on a project. If set upwell it can inform a variety of stakeholders at different levels and can provide information indifferent formats to suit the needs of different stakeholders. It is essential that lower levelschedules and reporting tools (Level 4 and 5) are vertically aligned with the level 3 schedule sothat progress rolls up seamlessly. The detailed level 3 schedules also needs to be verticallyaligned with the level 2 schedule and level 1 milestone schedules so that the data can roll-upseamlessly and to ensure consistency in schedule reporting at different levels. Different levelsof stakeholders have different information needs to enable them to plan and make decisionsfor future. High level management may be interested in high level cost performance summariesexpressed in dollars and level 1 Milestone dates, whilst project team leaders may be interestedin cost and schedule performance and productivity reports and resource histograms expressedin Full Time Equivalent (FTE) which help them plan for future manpower requirements, whereasfrontline construction supervisors are likely to be more interested in quantity tracking curves.At the start of the project it’s beneficial for Cost Engineers to be aware of the various reportingneeds and set up the project control system to enable reporting to a range of stakeholderswithout creating excess administration. This will increase the value of the project controlsystem by enhancing each key stakeholders’ visibility of their area of influence on the projectand best enabling them to identify trends and risks and apply timely mitigation. Although thecapacity to establish effective project controls is somewhat constrained by an organization’sproject management maturity, in most cases it should still be possible to establish a simpleEarned Value management EVM system that at least describes performance and progress forhigh level stakeholders.EVM.1747.8Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERFrequency of Updates and Record KeepingBy performing regular updates of the project schedule and EV system the project managersreceives regular feedback regarding project progress that enables them to respond quickly torisks and opportunities as they arise. The other advantage of regular updates and Earned Valuereporting is that it creates an excellent contemporaneous historical record of the project. Bymaintaining weekly records of the project schedule and earned value reports an entireperformance history can be retained including the projects critical path, productivity levels,records of the issues causing productivity problems and their impacts for any given week of theproject. Earned Value reports can be supplemented by verification of progress including sitephotographs and reports from quantity surveyors. This weekly history is like a time lapsecamera recording of project performance and is invaluable for creating a lessons learned forfuture projects and becomes excellent evidence for avoiding or resolving disputes regardingdelays, back-charges, disruptions and EOTs. If contractor and owner exercise effective earnedvalue management practice by setting up a logically linked network of resource loadedactivities, and agreed methods of measurement, and regularly monitor progress, incorporateagreed changes and revise forecasts against this network then they will always know wheretheir critical path is, will be in position to assess and measure how and why they are beingdelayed and will have the records to demonstrate these causes and impacts. Thecontemporaneous records from weekly updating and reporting help avoid disputes and theneed for retrospective analysis. During the set-up of the project PMB and project controlprocesses the Cost Engineer has a great opportunity to set the project up for success bydefining, and gaining project team commitment to, a reporting calendar that incorporates theweekly “drum beat” for status updates, performance reports (weekly and monthly) and teamprogress meetings.Change Management ProcessEvery scope change or variation that occurs on a project has the potential undermine or disruptthe validity of the earned value performance metrics if these changes are not tracked andcontrolled well. A disciplined change control process is absolutely essential in order for EVMperformance metrics to remain reliable when scope change occurs. The project team needs tobe proactive in:1) Identifying potential changes to the project scope, schedule or cost2) Assessing and documenting the cost and schedule impact of each potential change and,3) Ensuring that management are aware of the risks associated with potential changes andexpedite for timely decisions so that change management cycle times are kept as low aspossible.Approved scope changes should be included in the schedule forecast and added to theperformance measurement baseline as soon as possible after approval. Lack of clarity and slowdecision making regarding potential changes can result in distorted performance metrics,EVM.1747.9Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERincreased rework and high levels of uncertainty and inefficiency for owner’s and contractor’sproject teams. If a project is subject to frequent change proposals it is beneficial to have regularchange management workshops to encourage open discussion and effective, timely decisionmaking regarding all potential changes that are proposed. There are many factors that can havea large influence magnitude and frequency of changes and it is beneficial for a cost engineer tohave an awareness of them so that effective communication processes and controls can beestablished. Some of the larger sources of project change have been summarized in thefollowing sections.Risk ManagementProject risk reviews and workshops tend to involve a lot of decision making regarding projectpriorities and risk mitigation activities. It is very beneficial for the cost engineer to be involvedin these meetings to provide information to assist the decision making processes and to ensurethat all decisions made, changes and risk mitigation work is captured in the project forecast.The project budget should include contingency that allows for the project’s identified risks(“known unknowns”) and well as an allowance for unidentified risk (“unknown unknowns”). Byallocating budget to contingency in this manner it ensures that project progress is weightedappropriately overall progress allows for contingency as part of the uncompleted scope. Thecontingency can be drawn down upon via the change control process as risks and theirassociated treatments are identified during the project.Design Package RisksAnother significant risk occurs if the construction contract is awarded prior to the design beingcompletely mature. If design packages are evolving and being issued for construction while theconstruction phase is in progress it can cause changes in execution strategy, disruptions toprogress and cause significant project changes or variations.It is beneficial for the cost engineer to expedite the completion of design as much as possibleprior to awarding a fixed price construction contract to mitigate the inefficiencies caused to aproject by late project changes and the negotiation processes involved for fixed price contracts.The cost engineer should work with design teams to identify and expedite all constraints toreleasing holds from design packages, such as vendor data, so that the construction team canproceed with certainty and without disruption.Constructability RiskDifferent contracting models tend to yield differing levels of scope change during theconstruction phase. It is very beneficial to involve construction expertise as an integral part ofthe project team from the beginning of the project with participation throughout the designEVM.1747.10Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERphase. This collaboration will help ensure that construction phase safety and cost effectivenessis considered in the project design. The constructability review should include safetymanagement planning such as HAZID (Hazard Identification) and HAZOP (Hazard andOperability Study) and Planning for Traffic Management if applicable.Conducting regular constructability reviews during design phase with Construction experts and,where possible, the construction contractor help reduce the risk of constructability problemsespecially when the design and construction contractors are different entities. This wouldenable value adding input from the construction contractor and mitigate the risk of changeslate in the project.There are significant advantages when the Design and Construction Contractor are the sameentity thereby performing under a ‘Design and Construct’ contract. This ensures that there isearly input into the design from the Construction Contractor thus enhancing constructability,improving value engineering and reducing the risk of variations during the construction phaseof the project.Weather RisksCost Engineers need to understand the impact that weather has on the productivity of differentwork fronts, the historical weather patterns at the location of the construction project and beable to convey the weather risk to the project manager. They also need to be aware of thecontractual terms that are applicable on the project. Weather has the potential to have a largeimpact on project plans and the eventual success of projects. If a project is exposed to adverseweather it is important that the project team proactively mitigates the impact before itsimpact. Cost engineers are well placed to investigate weather risks, and include appropriatecost and schedule contingency, identify mitigation actions and include them in the projectplans. Both owners and contractors should take into account the number of typical days ofweather impact to be expected throughout the project as they develop their plans and forecasttheir productivity rates. Both the owner and contractor should have an understanding of theexpected number of lost workdays (including site clean-up) the contractor has allowed for dueto inclement weather and or the impact that weather is anticipated to have on productivity.The planning for these weather impacts should include the cost and time required formitigating weather impacts including activities such as access road upgrades, laying gravel sothat access isn’t as sensitive to weather, procuring pumps, ensuring appropriate contouring forwater run-off from key areas, having sumps to remove water from a site should a rain eventoccur and identify suitable dams or collection points to pump the water into.By defining responsibilities for the risk mitigation measures and gaining agreement betweenthe owner and contractor both owner and contractor understand their responsibilities earlyand weather impacts can be mitigated effectively. If commitments and obligations are unclearit can lead to problems during a weather event, for example pumps not being available and ordisputes between contractor and owner regarding what mitigation efforts should have beenEVM.1747.11Copyright AACE International.This paper may not be reproduced or republished without expressed written consent from AACE International
2014 AACE INTERNATIONAL TECHNICAL PAPERplanned for and undertaken. By working together and having a clear understanding of riskallocation and responsibility the owner an
using earned value on construction projects. It also provides practical examples of these benefits from a case study. The benefits of applying earned value management apply for both owners and contractors and, contrary to popular belief, there are risk reduction benefits to an owner even if the construction contract is fixed price
